In a speech that delivered China’s assessment of world trade conditions in 2024, commerce minister Wang Wentao last week warned the “environment is poor”.“Rising trade protectionism” and “intensified geopolitical conflicts” were among the main challenges, he told reporters in Beijing on Friday. But in China’s favour, he reassured his audience, were record exports from its “new three” industries: electric vehicles, solar energy products and lithium batteries.The rapid growth of China’s new breed of green exports — which rose 30 per cent year-on-year to Rmb1tn ($139.3bn) in 2023, according to Wang — has boosted the world’s second-largest economy as it struggles with a deep property slump, deflationary pressure and low investor confidence. But for its developed country trading partners, the prospect of China’s low-cost imports flooding their markets and wiping out jobs in important industries such as the automotive sector and solar and wind power is prompting growing alarm.Later this year, the European Commission is set to conclude an anti-subsidy investigation into Chinese EV production that could lead to higher tariffs for Chinese imports. Brussels is also considering emergency support measures for its solar panel manufacturing industry, including an anti-dumping investigation. The US, meanwhile, has slapped export controls on high-technology shipments to China.The EU and US are, to use officials’ preferred term, “de-risking” — in effect diversifying their sources of key products — and tightening investment screening for Chinese companies, essentially scrutinising transactions for national security concerns. Beijing has attacked the EU anti-subsidy investigation into EVs as “naked protectionism” and has criticised “de-risking”. But western critics argue China’s policymaking has been mercantilist for decades, with the methodical setting of targets to increase domestic supply chain self-reliance. Foreign companies complain they are facing growing obstacles to accessing the Chinese market. “I’m worried about this issue, that it could turn into another trade conflict between two of the most important trading partners,” says Wang Yong, professor at the School of International Studies in Peking University, referring to the EV dispute between China and the EU. “If that happens nobody will benefit,” he says, adding that China and its main trading partners need to think of “creative solutions” to avoid escalation.But George Magnus, an associate at Oxford university’s China Centre, says trade negotiators will struggle to prevent further fallout this year.The emergence of China’s “new three” and other industries that were developed with heavy state subsidies is bringing to a head a clash between the Chinese economic system, which closely marries state policy and financial support with an aggressive private sector, and the market-orientated capitalism of developed countries.“What both parties want is just not really acceptable to either side,” Magnus says. You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Developed countries, and those in the EU in particular, want China to dilute its industrial policies and focus on the domestic economy. Chinese leaders, meanwhile, “obviously like the idea of open trading relationships but it’s open trading relationships that are consistent with the way that they want to do industrial policy”, he adds.Developed countries have long grizzled about Beijing’s industrial policy but for the EU the discrepancies gained urgency in 2022, when China booked a “historic” trade surplus with the bloc of nearly €400bn. Brussels announced the anti-subsidy investigation when Chinese EVs began gaining market share last year. At the same time, the Ukraine war and the pandemic convinced European leaders they needed to diversify their sources of some key products in their supply chains, such as rare earths, which are dominated by China. Their actions came alongside measures in the US. As well as restricting Chinese access to advanced semiconductors and stepping up the screening of inward and outbound investments to and from China, in 2022 President Joe Biden signed the Inflation Reduction Act, which aims to strengthen America’s renewable energy manufacturing supply chain. “We do not want to see decoupling from China,” European Commission President Ursula von der Leyen told reporters on a visit to Beijing to see President Xi Jinping in December. “What we want to see is de-risking.”This was about “addressing excessive dependencies through the diversification of our supply chain . . . and thus increasing our resilience”, she said.Chinese officials responded by criticising Europe’s “restrictive economic and trade policies”. China’s foreign ministry director-general for European affairs, Wang Lutong, who participated in the meetings with the EU delegation, attributed China’s industrial development to mere “innovation”.Yet for Beijing, ambitious policies squarely aimed at reducing the economy’s reliance on foreign countries have been under way for decades. This was originally motivated by China’s desire to catch up with its western counterparts after decades in which the economy was largely closed to world trade during Mao Zedong’s leadership. But under Xi, who has sought to become more assertive on the foreign stage, it has become a national security imperative. “China was the original ‘de-risker’,” says Jens Eskelund, president of the European Union Chamber of Commerce in China. “It’s no secret that China has been talking about self-reliance for a very long time.”In the early 2000s, Beijing launched several industrial plans which aimed to reduce the nation’s dependence on imported technology to 30 per cent or less by 2020. But the plan that really worried western governments, including that of former US president Donald Trump, was “Made in China 2025”, which sought to elevate China’s technological prowess to the highest levels. Tao Wang, chief China economist with UBS and author of Making Sense of China’s Economy, says policymakers at the time were worried about rising labour costs, a rapidly ageing population and the growth of digital technologies overseas. “The idea was that China was facing this middle-income trap challenge,” Wang says. “And so we really needed to move up the value chain and upgrade our industry to be able to compete.”The worrying part of Made in China from developed countries’ perspective was that accompanying documents listed ambitious market share targets across 10 strategic industries, from IT and digital machine tools to robotics, aerospace and new energy vehicles. For instance, Chinese producers of 5G mobile network equipment and handsets should have 80 per cent domestic market share and 40-45 per cent international market share by 2025, according to analysis from the US Chamber of Commerce. To achieve similar targets, electric battery makers were offered subsidies that could account for more than 50 per cent of the cost of the product.You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.Foreign business groups attacked the plan as mercantilist, with the US Chamber saying it raised the “likelihood of growing inefficiencies and overcapacity in China as well as spillover distortions on a global scale”. After outcry from western governments, culminating in Trump launching a trade war on China, Beijing gradually dropped Made in China 2025 from official discourse. Xi began instead talking about “dual circulation”, essentially trying to balance exports and domestic consumption — an equilibrium Beijing has yet to manage, economists say. However, generous subsidies have continued to flow into many of the target sectors, from semiconductors to EVs. The 2018 prospectus of leading EV maker Nio, for instance, mentions not only subsidies targeting consumers, which are also common in the US and EU, but government handouts for building and operating public charging stations, as well as for product development, production facilities, research and development, asset acquisitions and low-interest government loans. In 2020, Nio received a nearly $1bn bailout from state-backed investors.China ended a 13-year consumer subsidy scheme for EV purchases in 2022. But local governments still offer subsidies and tax rebates and the central government has prolonged a tax reduction on EV purchases to 2027. CSIS, the US think-tank, has put Beijing’s cumulative state spending on the EV sector at more than $125bn between 2009 to 2021. Importantly for China’s state planners, the sector has met its targets. Chinese brand EVs held 79.9 per cent of the domestic market in 2022, according to state media.What has really alarmed the west about Chinese clean tech companies is that their technology is often superior to that of the US and other advanced economies.A European Commission anti-subsidy investigation into Chinese EV production, which has been gaining market share, could lead to higher tariffs for Chinese imports More
